Review of Steve Keen's talk at the Uni

I am now finally back in Glasgow, ready for yet another exciting semester at the University. Classes don’t start until Monday, but that doesn’t stop societies to hold events and guest lectures. One of these was the visit from Steve Keen, the Australian controversial economist routed in the post-keynesian tradition.

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I wasn’t too familiar with his works beforehand and I really enjoyed learning a bit more of his approach to economics. Some of the data usage, especially his simulation program MINSKY was beyond me, though. Nevertheless I found some interesting points in his talk.

He’s a heterodox economist, very fond of attacking the neoclassical consensus, which is also his focus. For instance he made a splendid explanation for how certain models used in conventional micro economics (Perfect Competition; Indifference curves;  Demand Curve Aggregation) are not only unrealistic but also internally incoherent. This was refreshing, as was his pounding away at the “Money Neutrality” idea in macro. Neoclassical economics normally argue that money is neutral in transactions going on in the economy, i.e. money is the common denominator of heterogeneous goods and services simplifying exchange of these goods and services, but that it doesn’t impact the transaction itself. However, it also argues that money is just a number, and what matters is the ratio between the values of goods. The prime example is, if the money supply would double overnight and everyone suddenly would have twice the amount of money they had yesterday, neoclassicals say this won’t affect the economy because prices would also double, maintaining relative prices as they were before. This is one of the reason they see inflation as harmless. 

That is of course mistaken, as money supply increases doesn't happen that way; they flow through the economy from bank lending and (artificial) credit expansion, where some groups access those new money before other groups do – also, as Keen pointed out, we consume predominantly out of habit, habits used to certain numbers for certain goods. Even if I suddenly have access to twice as much money on paper, I might still hesitate before buying goods of twice its “normal” price, regardless of the rational approach such an action would entail. 

On the disappointing side was more profound issues in the approach to economics. There was a comment from the audience saying that economics is unscientific when it uses a priori axioms, suggesting its methodology should mirror the hard sciences. Surprisingly, Keen agreed, and added that he doesn’t view economics as a science – rather a discipline. Perhaps a mere tautology, but it is ironic to the point of laughter, when he ten minutes earlier praised the usage of mathematics in economics. 

That’s funny, Professor: see, mathematics is a science that solely uses a priori axioms, just like geometry or logic. Demote a science on the basis of incorrect methodology is an adequate critique, but then it should be held consistently, even to "your own" sciences.  

I don't think Keen is actually placing these disciplines in the same category of “unscientific academia” as economics, but that's what his comment yesterday implied. On the contrary, and this is a point over which Austrians and Neoclassicals fight, you have to use a priori axioms in economics, or else you’re fumbling in the dark. The Economy is us. We are always changing, reacting to new conditions and information. Thus, contrary events can occur simultaneously. If you disregards a priori axioms and only rely on data collection like in the hard sciences, you might have instances where these events cancel out, or even produce a reverse effect, leading the scientist to mindless conclusions. Since economics involve people's actions, which are prone to change at whims and desires, we cannot simply observe data and draw conclusions from those, such as a biologist would. Keen's claim is nonsense. 

That leads me to the second disappointment in Keen’s approach. He’s firmly dedicated on using data, putting into his MINSKY simulation, yielding predictions and explanation of how the economy would work given certain inputs. Again mistaken on his own grounds; people are not “chess men you move on a board”, (to quote the Keynes vs Hayek rap video), "their dreams and desires ignored". Believing that you can map every event in future economic conditions smells of the same convictions Hayek viciously attacked in his Nobel Lecture Pretense of Knowledge in 1974. I thought we were past that...

Murphy and Callahan, back in 2001 when Murphy was still at NYU, added several striking critiques to Keen’s work in their review, for instance about labour economics. Keen does an excellent job taking down the labour theory of value, then turns around and constructs a “real price theory of value”, falling in the same Marxian trap of ignoring the subjectivity of costs.

Overall I must admit I was glad to finally get a taste of his work. After running into his name now and then does yield some interest in a person. Though I'm far from convinced. He has several methodological as well as logical flaws to account for.

A great way to start the semester – I really hope for more occasions to discuss the essence of economics. 

Mainstream Economics - What were you thinking?

They rest of you students, do you experience some kind of deeply surpressed anger when your lectures focus on misguided topic or even tell you incorrect points?

I do. Normally in socialist topics such as Public Policy, but today - last lecture of the semester - I'm directing my critique towards Economics. First a disclaimer. My impression is that someone regarding Economics as a hoax and their practicioneers as evil advocates for capitalism, would be somewhat surprised by the fact that economists disagree on things. Yes, we do. Quite strongly.

Ok, so large parts of the prestegious education given in Economics is what's normally referred to as Mainstream Economics or Neo-Classical Economics developted and originated in association with University of Chicago (thus, Chicago School of Economics). They normally come out in favour of free markets and limited government intervention, thus the resemblance with us, Austrian Economists. From today's lecture, I'll highlight some points that set us apart.

Redistributing Wealth from Rich to Poor

Our lecture was making the point that, overall, from a societal point of view, taking £1 away from a rich person in order to give a poor person food, would be beneficial. This, on the grounds that the marginal utility increase for the poor guy would be a lot larger than the marginal utility loss of the rich guy. The way Neoclassicals would go about this is that such an action would produce better effects for all, thus worth doing. Some kind of utilitarian moral ground.

Anyway. For Austrians this is proposterous, and somewhat bothersome that a hundred students of economics might carry such a claim into their work-life, employing that knowledge. Why? Because such a statement would require you to make interpersonal utility comparisons. That is; compare how much utility person A derives from any event in comparison to how much person B derives from identical action. This is impossible, and where Neoclassicals' mistake lies. You simply cannot make such comparisons; it is inherently incorrect - and even if it weren't, how are you to measure that? Rather, who is to measure that? People prefer stuff, rather than value them according to a numerical, measurable list in their heads. Any kind of statements of the sort that "Person A gains 5 units of utility from playing a video game, and Person B losses 2 units of utility from producing such a game" is misguiding. Humans don't act that way: we prefer something over something else, a preferance that constantly changes. The only way we can conceive this, thus giving us economists something to work with, is through prices paid on a voluntary basis.

So, no, you can't conclude that £1 is more useful for a starving poor person than taking away £1 from a rich guy. Simply incorrect.

Personal IRONY of NeoClassicals 

Lecturer: I don't like working for the government.
Student: Why not?
Lecturer: I did research in a consulting project once, where we came to a conclusion only to find that the government refuted the findings. "That's wrong, we can't use that", they said. I don't want to work for someone that decided the outcomes before I've made the research.

Seems credible, right? That's funny, because that's exactly what Austrians accuse NeoClassicals for;

Walther Block uses the example of his PhD studies at University of Chicago on the effects of Minimum Wage, and found that sometimes minimum wage was correlated to increased employment - contrary to what the NeoClassicals normally concludes. He checked his numbers, but they were correct. What did his supervisor say? "Block, you moron! Do it again, get the correct result!".

Funny that my lecture refuses to work for the government, on the grounds that they only want a particular outcome of any study, and then goes on lecturing NeoClassical Economics, which is guilty for the exact same charge.

"In the Exam you're not required to show comprehensive knowledge

- You're required to show textbook knowledge"

Ok, do I even have to assert this one? Lovely way of showing the NeoClassical idea that everything is the way they've once concluded it to be, and diverting from that renders you 0 points on an exam. Funny, especially when so much in their teachings is made on epistemologically senseless grounds.

Another day at University. It never ceases to surpise you, does it?